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Divide and Rule

Jonathan Clements, 12:36 am ET

EACH OF US TAKES our monthly income and then makes countless decisions—some big, some small—about how to use those dollars. How can we get the most from the money that flows through our hands? I find it helpful to look at this “income allocation” through three prisms.

Divvying it up. We can use our income for three main purposes: spending it today, saving it for tomorrow or giving it to others. Our instinct is to spend today, imagining that’ll bring us the greatest joy.

But this, I believe, is shortsighted. Research suggests there’s great pleasure to be had from helping others and from knowing we’re on track for a secure financial future. I’ve heard lots of people express regrets about the purchases they’ve made. I can’t recall ever hearing folks lament the wealth they’ve amassed or the charities they’ve supported.

Fixing to have fun. The key to financial flexibility is the size of our fixed living costs—the money we’re compelled to part with each month. Think of things like mortgage or rent, utilities, groceries, insurance premiums and taxes. The lower these fixed costs, the easier it is to save for the future and to give to others.

But these aren’t the only advantages that come with low fixed living costs. We can think of these fixed costs as our needs, though “needs” turns out to be a moving target—because they keep growing. A few decades ago, nobody needed a cellphone, hundreds of television channels, a car packed with safety features or dinner regularly delivered by DoorDash. Today, many view such things as necessities, boosting their fixed living costs.

This is a trend we should resist. The lower our fixed monthly costs, the less financially stressed we’ll feel and the more money we’ll have for discretionary spending—the things we don’t need but rather want. These wants might include vacations, concerts and eating out, those special events that brighten our calendar and get us out of our daily routine.

Buying happiness. How should we spend our discretionary dollars? Many HumbleDollar articles mention the important distinction between possessions and experiences, and how experiences often deliver greater happiness.

Why is that? Possessions might seem shiny and exciting when we first acquire them, but they can quickly become humdrum and even disappointing, as they deteriorate and break. Their lasting value, which initially appears to be a virtue, means they often last long enough to earn our disdain. By contrast, experiences tend to be time limited, leaving us only with fond memories, plus they’re often enjoyed with others, adding to the happiness they deliver.

While I’m a big fan of spending on experiences, I’d also put in a plug for not spending—because that can buy us something that rivals the happiness from our most treasured possessions and our most thrilling experiences. I’m talking about the sense of financial security that comes with money not spent and instead stashed in a bank or brokerage account. A few thousand dollars in a savings account will likely deliver greater long-term happiness than anything that money could buy at the shopping mall.

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OldITGuy
OldITGuy
19 days ago

I agree. Your article reminds me of a conversation I had with my mother when I was very young (like 11 or so). I remember her telling me that saving is only half of it, and that it’s equally important to spend your money well. She went on to discuss how easy it is to thoughtlessly spend one’s money on short term things that don’t give lasting satisfaction. That conversation has always stuck with me. I guess even as a child I could recognize the wisdom in it and I’ve definitely thought of it multiple times in my life. Thanks Mom, and thanks Jonathan for reminding me of that special moment.

Jo Bo
Jo Bo
19 days ago

Wise words, indeed!

So many think of experiences as vacations or events. Spending on experiences should include the purchase of items used in the pursuit of hobbies or new learning. Time spent behind the lens, pursuing art, learning a new language, doing carpentry — any pursuit, really, that is immersive — can be not only extraordinarily satisfying but also quite memorable.

David Hensley
David Hensley
19 days ago

Excellent thoughts Jonathan. We focus on investment asset allocation but it can be easy to lose sight of spend allocation. I love you reinforcing keeping your fixed costs low to allow for flexibility with finding your fun.

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